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Despite tax hike, Chicago still faces huge pension fund gap

Chicago's recent tax hike will help fill a multibillion-dollar hole in its public pension funds, but it won't be enough to close the gap, according to a report Tuesday by bond rater Moody's.

"Despite significantly increasing its contributions to its pension plans, Chicago's unfunded pension liabilities could grow, at a minimum, for another 10 years," the report said.

Last month, the Chicago City Council approved a $7.8 billion budget that includes a highly unpopular tax hike proposed by Mayor Rahm Emanuel to make up for years of underfunding city workers' pensions. The package included a $543 million property tax hike, phased in over four years, increases in other fees, and spending cuts aimed at filling a $20 billion hole in the city's pension obligation.

With one of the largest and most troubled pension systems in the country, Chicago and its efforts are being widely watched around the country by millions of public retirees in dozens of older cities with large badly underfunded pensions.

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Last year, Moody's estimated that U.S. public pensions don't have nearly enough to pay what they owe current and future retirees. The top 25 biggest public retirement systems alone — covering 40 percent of the $5.3 trillion in total public plan assets — are at least $2 trillion short of what they'll need to make good on the promises to millions of police, firefighters, teachers and other public sector workers.

Since then, those unfunded pension liabilities have continued to rise faster than revenues for state and local governments. Some have responded with benefit cuts, delayed retirement ages and increased contributions from pension plan participants.

But the rising burden is also crowded out spending on other services provided by state and local governments. Higher taxes and city service cutbacks prompt residents and businesses to move elsewhere, dampening a city prospects economic growth and reducing the tax base.

"This is the equivalent of a municipal illness," Chicago Alderman Patrick O'Connor told Reuters last month shortly after voting in favor of the city's latest budget. "We don't have the option of saying no. We have the option of picking our choices for staying alive."

But even with a half-billion-dollar tax hike, the fate of Chicago's latest fiscal fix is still up in the air.

Since the new fiscal year began July 1, an epic budget battle between Republican Gov. Bruce Rauner and Democrats who control the legislature has left Illinois without a spending plan, which is critical to Chicago's efforts to fix its pensions. Only Pennsylvania and Illinois, which has the lowest credit rating of the 50 states, have not passed a budget.

As a result of the budget impasse, a state official said last month, Illinois will have to delay a $560 million pension payment this month and may have to delay or cut a payment in December,

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"The fact is that our state simply does not have the revenue to meet its obligations," state Comptroller Leslie Munger told a news conference in Chicago.

Those payments would be made up in the spring, she said, when revenues typically pick up.

But even if the state passes a budget, Chicago's pension fix faces another hurdle in the Illinois Supreme Court, which has scheduled arguments for Nov. 17 over a 2014 law that changed the pension plans benefits.

The changes required higher pension contributions from workers and replaced an annual 3 percent cost-of-living increase for retirees with one tied to inflation. The city argued that the changes improved workers' and retirees' benefits by saving the retirement systems from going broke. But a Cook County Circuit Court judge in July rejected Chicago's argument, and the city appealed the decision.

In 2013, the higher court had ruled that found public sector workers have ironclad protection in the Illinois Constitution against pension benefit cuts.

But those protections are coming under severe pressure as cities like Chicago struggle to make up for decades of underfunding with higher taxes and benefit cuts.

No matter what happens with the state's budget or the Supreme Court's decision, Moody's estimates, Chicago's pension liabilities will continue to grow.